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Banking in uncertain times

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Re: Banking in uncertain times

#181

Post by spir »

lordfrito wrote: post #75
spir wrote: post #58

Earlier quoted context omitted.

You're right, last weekend, USDC dropped to a low of ~$0.88. However note - SVB was closed on a Friday (as is the FDIC's custom). This meant that USDC could not process redemptions over the weekend as banks were closed, and this created fear in the market. - USDC had 8% of their reserves trapped in SVB. The fair market value of USDC would have been $0.92 if all SVB deposits were lost, which was never likely. - crucia…

> stablecoins are about to become a Very Good Deal for ordinary people > the UX of stablecoins is becoming vastly superior to bank deposits because you'll be immune to bank runs, control your own money, and have instant access to global markets, including for low-risk yield on your stablecoins, such as in treasuries or over-collateralized lending I disagree, but OK > over the weekend, USDC did lose its $1 peg and tra…

For your objection to refute my thesis, you'd need to explain how a world with stablecoins that are immune to bank runs, where those stablecoins are held in next-gen wallets and can be swapped into any asset in the world 24/7 any time you want at the click of a button, is not a superior UX vs. today's bank deposits.

Re: Banking in uncertain times

#182

Post by pearjuice »

skwirl wrote: post #148
pearjuice wrote: post #109

Earlier quoted context omitted.

Given the bank's yield is some sort of formula with regards to how much and succesful they are in investing/loaning-out the capital of their depositors. Then how is it not a moral hazard, when the bank gets a signal that the FDIC will cover all this capital, regardless what the bank does with it? Even if the bank asset can go to 0, in the end the vehicle used to prop up this asset will come from the depositors. If I…

I think there's a real misunderstanding here with the distinction between banks, depositors, and what protections apply to each. The scenario (betting on red) is illegal, but assuming it was not, it doesn't matter to the bank whether or not its depositors have their deposits protected. I can kind of assume what your misunderstanding is, but it's not completely clear. I think you are assuming that if the deposits are…

As I said, the scenario outlined is hyperbole... Practically, they won't actually bet on red but use all kinds of financial instruments to achieve the largest amount of yield possible with the depositors capital at their disposal. I'm aware the bank is wiped out and the deposits are no longer managed by SVB. None of this refutes the point that until the bank goes bust, the bank will try to maximize yield and shareholder returns with the cost being their own capital. The depositors capital, is an extra with no cost. As far as I am aware, shareholder profits won't get clawed back. Now that the $250K FDIC barrier has been lifted, the moral hazard is that the bank (not SVB which no longer exists, but any other bank) is no longer responsible for whatever happens with the capital of their customers - even if they would go completely bust; the FDIC will fix it.

Re: Banking in uncertain times

#183

Post by nostrebored »

bombcar wrote: post #146
nostrebored wrote: post #129

Earlier quoted context omitted.

> But… they aren’t real yet? Barring something extremely abnormal happening, aren't low-yield bonds seeing real losses already due to inflation? Like it doesn't have to be the spot price we're talking about, aren't many of them toxic already and others expected to track there?

This is true, but there can be a lot of slight of hand when talking about dollars and future dollars. Banks run on nominal dollars, and SVB would have remained capitalized if withdrawals hadn't overwhelmed their ability to get ready cash, which caused them to sell at a loss, which spooked everyone, causing a run.

Right, but if they're expected to be toxic you would mark them down nominally as well. It's not like the real losses aren't also nominal when realized.

And whether the metric you care about is the real losses or the expected nominal value at maturity depends on whether inflation continues to raise. As this also suggests interest rates increase, you get hammered on both sides.

Re: Banking in uncertain times

#184

Post by dragonwriter »

hn_throwaway_99 wrote: post #125
echion wrote: post #116

Earlier quoted context omitted.

> why is it that we allow a bank to not mark-to-market a security for which there is a liquid market? Because at maturity, the bank gets back its money. So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today". The "I intend to hold it" is the relevant part of the valuation, though.

> The "I intend to hold it" is the relevant part of the valuation, though. Yup, and definitely anticipate there will be major new regulations in this area. A huge part of SVB's book of bonds were categorized as "Hold to Maturity". And, legally, if you mark bonds as HTM, you are not allowed to hedge against their interest rate risk. Basically, the regulations say that if you're hedging against interest rate risk, you…

> Yup, and definitely anticipate there will be major new regulations in this area.

It already happened. The new regulation is that the Fed now has a liquidity backstop for banks holding this asset class, using cash loans with a set maximum term against the par value.

Apparently the Fed decided “if we treat it this way for capital adequacy, and we provide liquidity backstops for banks for other asset classes based on how they are valued for capital adequacy, maybe we should do the same thing here, since otherwise adequate capital can easily and suddenly become inadequate.”

Re: Banking in uncertain times

#185

Post by dorianG4 »

Time to disrupt banking by making it go the way of rotary phones.

Foisting belief someone like paulg is worth billions given cherry picked math that makes it so does not make paulg special.

It’s traditional political corruption embedded in the minds of inept and infirm, shell shocked by war, made paranoid by cold wars, that makes the rich rich.

It’s policing society to make us all believe Elon or Billy G are wealthy.

Propaganda and information shaping from war era government research was gifted to university and converted into behavioral economics, advertising, and marketing programs. Americans are oblivious they’re just eating their own farts and BS.

Re: Banking in uncertain times

#186

Post by anonymouse008 »

lordnacho wrote: post #104

As a former trading desk guy I struggle to see how the system allows things to be marked-to-cost. Or rather, why is it that we allow a bank to not mark-to-market a security for which there is a liquid market? Allowing the bank to pretend it has more assets than it actually has seems to be an invitation to hide risk. If they had to MTM their underwater bonds, they would would have been pushed to raise capital earlier,…

You know as well as I that the reason is that cash was able to sit in banks without losing money as a depositor. That gentleman's agreement is gone, due a set of actors' individualistic and uncooperative actions.

Re: Banking in uncertain times

#187

Post by Redoubts »

> This realization creeped in around the edges with e.g. Byrne Hobart on February 23rd noting that one of the U.S.’s largest banks was recently technically insolvent but almost certainly in a survivable way.

If you’re wondering what this was, presumably this is the moneyshot of the paywall blog

https://twitter.com/byrnehobart/status/1628779894183272452

Re: Banking in uncertain times

#188

Post by fwlr »

stanleydrew wrote: post #127
UncleMeat wrote: post #124

Earlier quoted context omitted.

But the entire point of computing current assets is to understand the effects of rapid withdrawals from the bank. If you are trying to predict the future value of the bank or how much money they will make then looking at the value at maturity makes sense. But the regulatory system doesn't (or shouldn't) care about that. The regulatory system should be concerned with estimating and mitigating the risk of sudden bank f…

I believe this is what various "stress tests" are for. If your bank is a certain size you have to basically do scenario planning for situations like ”what if 25% of your deposits leave overnight and you have to sell securities that you didn't plan to sell?” As I understand the situation, SVB was just under the required size to submit to those stress tests.

There are smaller tests for liquidity, but the specific major stress test that SVB lobbied themselves out of is the DFAST (the Dodd Frank Act Stress Test) and it does not test liquidity. It takes the scenario of an adverse economic situation and comes up with a bunch of hypothetical numbers you might see for major economic variables - “the unemployment rate will be this, the default rate will be that, etc,” - and then banks have to run their books according to those hypothetical numbers and report back what their capital would look like in that situation. If it looks bad, they have to take action to make their capital more secure. Nowhere does it simulate a situation where depositors leave en masse.

There are liquidity tests and SVB was probably failing them (which is probably why the FDIC was paying close attention to them), but that specific test you’ve heard about is not related.

Re: Banking in uncertain times

#189

Post by notShabu »

spir wrote: post #47

Stablecoins are conspicuous in their absence in patio11's post. Personally, I believe that patio11's loathing of crypto has made him incurious about its potential. But that's not the point here. The point is that stablecoins are about to become a Very Good Deal for ordinary people: In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in veh…

A good point is individuals could be better off if they could open an account at the Fed and have access to "real" dollars rather than the numbers that are just bank IOUs

Stablecoins are closer in this direction than banks but only if they actually maintain 1:1 reserves. One advantage is that b/c they are protocols there is less need to seek returns to make payroll, rent, and profit. Another is more transparency.

But also... at this point such a stablecoin is basically a CBDC...

Re: Banking in uncertain times

#190

Post by kmod »

s1artibartfast wrote: post #170
kmod wrote: post #165

Earlier quoted context omitted.

Welcome to a non-zero interest rate environment. "$100m equivalent today" is not $100m -- the term to search for is "net present value". These considerations are precisely what marking to market captures

If those assets are in your hold to maturity portfolio, they are still worth $100m. This return is guaranteed unless the Federal Bank defaults on those treasuries.

$100m future dollars, which are less valuable than present dollars.
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